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CMA
March 17, 2017  

CMBS Providers Act on Borrower Complaints

In response to complaints from borrowers, some commercial MBS lenders and servicers have unilaterally started taking steps to reduce fees and red tape associated with routine requests by property owners during the life of loans.

Industry participants have grown increasingly concerned over the past year that borrower frustration with CMBS procedures caused a backlash that has contributed to a decline in the market share of CMBS lenders. The industry’s trade group, the CRE Finance Council, has set up a roughly 20-member task force to propose improvements. But in the meantime, some lenders and servicers are implementing initial changes on their own in an effort to streamline the approval of new tenants, property releases, loan assumptions and other borrower requests.

Among lenders, two of the biggest CMBS shops — Wells Fargo and J.P. Morgan — began incorporating numerous changes in the individual loan documents and pooling and servicing agreements in the middle of last year. And other major lenders are at least taking a hard look at instituting similar reforms.

At the same time, leading servicers, including Wells, Midland Loan Services, KeyBank and Berkadia, have also been pursuing borrower-friendly initiatives via independent efforts and joint talks with other servicers, lenders and B-piece buyers.

Meanwhile, CREFC’s new Servicing and Issuer Task Force has met three times so far in an effort to craft a set of uniform standards and practices for CMBS lenders and servicers.

Immediate plans call for drafting a basic framework, possibly by yearend, that would address some of the longtime concerns raised by borrowers about conflicting provisions or lack of clarity in loan documents. The framework should also try to prevent excessively complicated review procedures for relatively minor issues, said task force chairman Joseph Franzetti, senior vice president of capital markets at Berkadia.

“Our focus is on improving the borrower experience,” he said. “We’re looking to examine how things are done and see if there’s a way to do it that doesn’t diminish any of the credit aspects that investors expect.”

The task force was formed in September, soon after nine major issuers and bond buyers sent a letter to the trade group outlining concern that CMBS-servicer practices had damaged the industry’s reputation. Their grievances about master servicers included complaints about lengthy response times and costs associated with routine requests, the timeliness and accuracy of property-level reporting and the quality of status reports on troubled loans. For special servicers, the group cited questions about the timing and fairness of collateral dispositions and about whether unnecessary fees are sometimes being assessed even when loans pay off at maturity.

In the letter, the signers said if they aren’t addressed soon, the concerns “have the potential to have long-term implications for the product and erode investor confidence at a time when CMBS issuance levels are already depressed.”

For their part, borrowers have complained for years about lengthy response times and costs associated with routine requests. But there was not much impetus for lenders and servicers to address the concerns until the pace of CMBS issuance fell off sharply last year amid increased regulations and bond-market volatility.

“Last year was a bit of an eye-opener,” said managing director Doug Mazer, the head of real estate capital markets at Wells. “We really saw the insurers and banks eating into our market share.”

While broad market forces certainly contributed to the trend, the conscious decision by some frustrated borrowers to avoid tapping the CMBS market again also played a role, he said. “We heard a lot of feedback from borrowers about too many unexpected fees, too many cooks in the kitchen and reviews that took too long,” Mazer said. “They felt they were being ‘nickel-and-dimed’ by servicers, and that can be fairly annoying to borrowers when you add it all up.”

Wells has rolled out procedural changes on both the lending and servicing sides of the business over the past six months or so. Midland, Key and Berkadia have been pursuing similar initiatives — partly to keep pace with evolving agreements between lenders and borrowers, but also introducing some reforms of their own.

The changes go only part of the way toward addressing the scope of the issues cited by the issuers and bond buyers in their letter to CREFC.

“This is an evolutionary process that’s going to take a while,” said executive vice president Alan Kronovet, head of commercial mortgage servicing at Wells. “The work being done at CREFC has jump-started the conversation and started people talking,” he said. But for now, “all of this is happening transaction by transaction.”

Midland said it began working on such efforts two years ago, as part of a broader focus on improving customer relations by its parent, PNC. Midland has enhanced its approval processes and launched a series of borrower-feedback surveys, said executive vice president Stacey Berger. Midland has also established an ombudsman for master servicing and another for special servicing. Borrowers can call them directly if problems can’t be resolved through normal channels.

Both Wells and Midland have taken steps to get borrowers faster answers with less paperwork on routine inquiries. For example, on loans originated by Wells, a property owner is no longer required to submit copies of contractor invoices, checks and other receipts when seeking a cash disbursement of $500,000 or less from a reserve account.

Also, in its originations, Wells recently eliminated servicer fees for reserve disbursements, lease approvals, letter-of-credit releases and reviews of property-management and hotel-franchise agreements.

Wells, Midland and some other members of the CREFC’s task force have also been testing or discussing other ways to process certain borrower requests more quickly. It has long been customary for several parties in a CMBS transaction, including the primary, master and special servicers and even the controlling-class holders, to review applications for loan assumptions, new tenants and a lengthy list of other matters.

Clearly, it would be more efficient to send each request directly to the parties whose approval is most crucial, without always requiring a review by everyone in the chain. One way to do that is by setting certain thresholds to determine how extensive each review needs to be. For instance, it might be enough for the primary and master servicer to vet a request related to an in-line store at a shopping center. But if an anchor store is involved, it would make more sense to delegate that authority directly to the special servicer and possibly the controlling-class holder, Kronovet said.

Under the latter scenario, “Is there really any value in us, as the master servicer, doing our review before it gets to the special servicer?” he asked. “The industry is trying, frankly, to eliminate extra steps in the process that don’t add much value.”

As previously reported, J.P. Morgan last fall introduced changes to some servicing procedures that had attracted criticism.

The provisions limit the conditions under which a loan can be transferred to special servicing. Also, a loan that doesn’t pay off at the maturity date can’t be transferred for up to 120 days if the borrower has a written agreement to refinance the loan or sell the collateral. Both provisions can spare the borrower or securitization trust from special-servicing fees.

Another provision limits the B-piece buyer from getting involved in certain types of servicing decisions, such as approval of a property-manager replacement or the release of funds in escrow. B-piece buyers have usually demanded that special-servicing fees for such approvals be passed through to them.